FM8e- EOC Sol Ch27

FM8e- EOC Sol Ch27 - Chapter 27 Financial Management in...

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Unformatted text preview: Chapter 27 Financial Management in Not-for-Profit Businesses ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 27-1 The goal of a not-for-profit depends on its mission statement. In most cases, a not-for-profit is set up to provide some service to the community and so its responsibility is to this constituency, also called stakeholders . There are no formal owners, as there are for investor-owned companies, and so it is in many cases much more difficult to determine who a not-for-profit should please. In its most general terms, the goal of a not-for-profit is to maximize the value of whatever goal is stated in its mission statement, with the recipients of this value being the stakeholders. In the text we formalize this with the concept of Net Present Social Value in which a dollar figure is assigned to the social value that the company provides whether or not the company actually is paid for the service, and whether or not the payment for the service is the full amount that would be charged by an ordinary for-profit firm providing the same service. In this formalism, the goal of a not-for-profit is to maximize the net present social value, subject to the constraints that the firm must make a sufficient cash profit, or raise sufficient contributions, so that it remains financially viable. For the most part, the financial decision rules that for-profit firms use can be applied with some minor adjustments. First, we noted above that the total value of the services, not the dollars received for the services, should be considered. Second, the firm must generate enough cash to pay its bills. (You cant pay the electric bill with uncompensated charitable servicesyou need cold hard cash, so you must generate enough of it so your checks wont bounce.) However, that said, in some cases it is very difficult to assign a dollar value to the service that a not-for-profit provides, and in those cases the firm will have to make a value judgment as to whether to undertake a project. In many types of investment projects, the goals of a not-for-profit and a for-profit firm coincide. For example when deciding what type of van to use, what technology to purchase for heating and air conditioning the offices, or whether to replace worn-out equipment, the goal is to get the best value for what is spent. The analyses a not- for-profit and a for-profit would undertake would be identical. However, when deciding whether or not to build a new hospital wing, or a museum, the not-for-profit and the for-profit would use different approaches, with the not-for-profit using NPSV if possible, and the for-profit using NPV. 27-2 A not-for-profit does not have owners, so it doesnt have equity....
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This note was uploaded on 08/29/2009 for the course FM Finance taught by Professor Unknown during the Spring '09 term at DeVry Addison.

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FM8e- EOC Sol Ch27 - Chapter 27 Financial Management in...

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